Question

A famous quarterback just signed a $18.0 million contract providing $3.6 million a year for 5 years. A less famous receiver signed a $17.0 million 5-year contract providing $4 million now and $2.6 million a year for 5 years. The interest rate is 10%. a) What is the PV of the quarterback's contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Present value $ million b) What is the PV of the receiver's contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Present value $ million c) Who is better paid? A. Quarterback B. Receiver

Answer 1

a. QUARTERBACK'S CONTRACT

Year Cashflow DF@10% PV

$'m $'m

1-5 (3.60) 3.7908 (13.65)

PV (13.65)

b. LESS FAMOUS RECEIVER

Year Cashflow DF@10% PV

$'m $'m

0 (4.00) 1.00 (4.00)

1-5 (2.60) 3.7908 (9.86)

PV (13.86)

The less famous receiver is better paid because he received the highest present value.

Step-by-step explanation:

In this case, there is need to calculate the present value of each contract by multiplying the annual cash outlay by the discount factor. The discount factor is obtained from the present value of annuity factor table of 10% for 5 years.